Survey II Results – Winter/Spring 2010


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The Pepperdine Private Capital Markets Project previews key finding from its forthcoming 126-page report detailing the 2010 outlook for private capital providers and privately-held businesses.

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Survey II Results – Winter/Spring 2010

  1. 1. Survey II Findings– Winter/Spring 2010January 27, 2010<br />John K. Paglia, Senior Researcher,<br />Denney Academic Chair, <br />and Associate Professor of Finance<br />
  2. 2. Private Capital Markets Survey <br />Web-based survey that included banks, asset based lenders, mezzanine funds, private equity, venture capital, and privately-held companies<br />Typical survey asked about firm profile, credit box, historical returns, expected returns, view of next 12 months<br />Capital providers were surveyed in October and November 2009<br />Over 700 responses<br />
  3. 3.
  4. 4. Banks (Senior Lenders) <br />Tough Credit Environment<br />Despite fewer applications, the time to process loans has increased<br />82% report reductions in credit quality of borrowers<br />45% report smaller loan sizes<br />64% report reductions in cash flow multiples<br />45% report declines in standard advance rates on collateral<br />Industry Challenges Continue<br />Increases in delinquency rates (nearly half report an increase)<br />Increases in charge-off rates (nearly half report an increase)<br />80% report the number of loans being made by competitor banks declined<br />
  5. 5. Banks (Continued)<br />Motivations for Loans<br />Refinancing at 40.2% (44% previously)<br />Acquisitions at 17.1% (7% previously)<br />Growth at 9.8% (12% previously)<br />Important Factors when Lending<br />Collateral at 14.8% (7% previously)<br />Liquidity (14.1%)<br />Debt to cash flow (12.2%)<br />Fixed charge coverage (12.1%)<br />
  6. 6. Asset Based Lenders <br />Restrictive Credit Environment<br />82% report increases in loan applications<br />73% report lower percentage of borrowers approved for credit<br />Industry Concerns Linger<br />Increases in delinquency rates<br />Increases in charge-off rates<br />Declines in the number of loans being made by competitor banks<br />
  7. 7. ABLs (Continued)<br />Motivations for Loans<br />Refinancing at 44.1% (53% previously)<br />Growth at 20.2% (12% previously)<br />Acquisitions at 10.4% (22% previously)<br />Advance Rates <br />Vary by collateral type and quality<br />Highest for marketable securities and receivables<br />All-in Rates Decline Significantly for Larger Loans: Working Capital<br />
  8. 8. Mezzanine Funds<br />Signs of Growth<br />Nearly 78% report increases in business plans received<br />Slight net increase in number of investments being made<br />54% of respondents report growth in the size of industry<br />48% report increases in warrant coverage<br />Risk Aversion<br />Nearly 52% report a decrease in cash flow multiples<br />56% indicate a decreased appetite for risk<br />48% report an increase in interest rate spreads<br />Net increase in tightness of financial covenants<br />Motivations for Loans<br />Refinancing at 31.6% (33% previously)<br />MBOs at 24.6% (21% previously)<br />Growth at 20.6% (22% previously)<br />
  9. 9. Mezzanine (Continued)<br />Financial Ratios<br />A typical firm will invest up to 4X EBITDA (3.75X previously)<br />Up to 2.5X can be senior debt (unchanged)<br />Minimum fixed charge ratios are 1.1X (1.2X previously)<br />Pricing<br />Median coupon rate of 14% (previously 13%)<br />Nearly 58% with PIK provision<br />65% of deals with warrants (4-8% of diluted ownership)<br />Expect 8% return on warrants<br />Targeting Service and Manufacturing Over Next 12 Months<br />
  10. 10. Private Equity<br />Challenging Investing Environment<br />53% report a decline in leverage multiples<br />62% report a decline in deal multiples<br />68% report a longer time to exit deals<br />70% report a decline in the size of industry<br />Interesting Minority Interests<br />Nearly 70% of respondents report willingness to invest in minority interests with investor protections<br />Median discount from pro rata is 20%<br />Deal Flow Funnel<br />100 plans reviewed (up from 80)<br />15 meetings<br />5 term sheets<br />2 letters of intent<br />
  11. 11. Private Equity (Continued)<br />Exit Plans for Portfolio Companies<br />43% report plans to sell to a public company (up from 35%)<br />30% plan to sell to another PEG (34% previously)<br />7% IPO (previously 9%)<br />Service and Manufacturing Industries Targeted Over Next 12 Months<br />Service at 30.7% (up from 27.3%)<br />Manufacturing at 23.8% (up from 21.3%)<br />Retail down to 0.8% from 4.1%<br />
  12. 12. Venture Capital<br />Contraction Continues...<br />59% report a decline in percent of plans funded while 66% report decreasing percentages of “up” rounds<br />61% report an increase in time to exit<br />73% report a decrease in appetite for risk<br />61% believe fundraising prospects have declined<br />91% report a contraction in size of industry<br />Yet Hope Remains<br />Nearly 48% report increases in number of business plans received<br />Approximately 46% report an increase in number of high-quality investment prospects<br />45.5% report increases in quality of portfolio<br />Review 100 Business Plans to Close a Deal<br />
  13. 13. Venture Capital (Continued)<br />Higher Expected Sales to TVI Ratios for New Investments Made in Last 6 Months<br />Stage 1 increased from 8.2X to 9.5X<br />Stage 3 from 6.4X to 8.5X<br />Stage 6 rose from 3.9X to 5.5X<br />Longer Expected Time to Exit for New Investments Made in Last 6 Months<br />Stage 1 from 6.2 years to 7.5 years<br />Stage 3 from 5.1 years to 6.5 years<br />Stage 6 from 3.8 years to 3.5 years (shorter)<br />Implied Returns on Investment Lower<br />Stage 1 from 40.5% to 35.8%<br />Stage 3 from 43.5% to 41.4%<br />Stage 6 from 43.3% to 43.0%<br />Exit Plans<br />Sell to public company is 58.9% (previously 50%)<br />Sell to private company is 21.6% (previously 24%)<br />IPO is 12.4% (down from 17%)<br />
  14. 14. Venture Capital (Continued)<br />California is Target for Nearly 36% of Investments over Next 12 Months<br />Nearly 10.7% outside of U.S.<br />5.7% in Texas<br />Massachusetts decline from 6.9% to 3.6%<br />Clean Technology is Industry Targeted for Largest Concentration of New Investment over Next 12 Months<br />Increase from 12.3% to 14.5%<br />Software from 15.8% to 13.5%<br />Hardware from 6.7% to 3.2%<br />Biotech from 11.6% to 9.8%<br />
  15. 15. Privately-Held Businesses<br />Glass Half Empty or Half Full?<br />Despite nearly 50% indicating increased competitive pressures, approximately 64% report that growth opportunities increased relative to 6 months ago<br />However, nearly 46% report decreased access to capital<br />Businesses Report Varied Costs of Capital, Paybacks, and Expected Returns<br />Realistic, Optimistic, or Delusional?<br />Approximately 57% believe they qualify for a bank loan<br />Nearly 47% believe they qualify for a private equity investment<br />Almost 41% believe they qualify for venture capital<br />
  16. 16. Investment Analysis Techniques <br />Frequency of Use in the Private Markets<br />
  17. 17. 12 Month Outlook<br />
  18. 18. Thank You!<br />John K. Paglia<br />Associate Professor of Finance<br />Senior Researcher, Pepperdine Private Capital Markets Project<br /><br /><br />